Introduction
 
 
 

“WE HAVE ACHIEVED EPS GROWTH OF 45% IN 2003 AND 36% IN 2004 - almost 100% in the last 2 years. Cash conversion was over 100% for each of the last 3 years. Acquisitions are providing returns ahead of cost of capital, organic investments have moved into profit and both should continue to further drive earnings growth.”

Cash Flow
Operating cash flow was £135.3 million compared to operating profit before amortisation of goodwill of
£132.3 million. This represents a cash conversion of 102%.

Given that we achieved 140% in 2002 and 119% in 2003 this represented a strong performance by the business. PRN once again produced an exceptional performance with cash conversion of 131%.

Capital expenditure for the year was £8.5 million, this was again less than our depreciation charge of £12.9 million, however as we said last year the two are converging.

The performance of five once again improved significantly with operating profits increasing to £19.5 million from
£8.5 million. We said last year that we expected five to be cash flow positive and indeed it was; we received around £15million of cash from five in 2004.

The cash outflow in respect of property was again reduced to £16.1 million from £23.1 million. We paid tax of £10 million.

Balance Sheet
Our balance sheet remains strong. Despite spending £191.9 million on acquisitions, our overall year end net debt position was only £68.8 million.

The performance of our fixed assets investments improved during the year, not only five but also SDN, SIS and PA.
This performance should have increased their value as we move towards monetising these assets. In addition, the group has written down certain fixed asset investments by £11.7 million to reflect their expected realisable value.

We recognised a net exceptional tax credit during the year of £121.0 million. This represents the resolution of a number of tax issues. Overall our tax creditor reduced to £208.0 million. This represents a prudent assessment of the potential liability for prior years across different geographies. This creditor has consistently been classified as short term in line with our accounting convention. We do not expect the cash outflow in 2005 in respect of this creditor to exceed £20 million.
Investment Performance

In 2003 we spent around £130 million on acquisitions, last year we said that “We expect these acquisitions to produce at least £13 million of operating profit in 2004”, they exceeded this. They achieved a pre-tax return on capital employed at around 13%.

In 2004 we spent £191.9 million on acquisitions – CMPMedica. We do not expect this acquisition to achieve a return equal to our cost of capital in its first year. Given its track record for growth we expect its returns to quickly improve, enhanced by organic investment and bolt on acquisitions.

The performance of our organics improved in 2004, with both revenue and operating profit increasing in line with our expectations. Substantial further investment is planned in 2005 to accelerate revenue growth.

Impairment
We have reviewed the carrying value of our intangible assets (including goodwill) in light of current trading conditions and expectations and consider that no additional provision for impairment is required in the current year.

Pensions
At 31 December 2004 the aggregate deficit had increased to £95.2 million from £83.9 million largely reflecting an increase in the inflation assumption.

The FRS 17 interest charge was £3.4 million slightly below our expectations.

Funding and Financial Risk Management
The group’s central treasury is principally concerned with managing internal and external funding requirements, the monitoring of working capital and management of key financial market risks. Its activities are carried out in accordance with policies approved by the board and are subject to regular review and audit. Contracts are entered into with approved counter parties and not on a speculative basis.

The group borrows and invests centrally on behalf of its subsidiaries with the aim of maximising liquidity, security, flexibility and price competitiveness. At the end of 2004 £449 million of sterling equivalent debt remains in issue comprising of $400 million of convertible bonds (for details on redemption and conversion see note 21), $250 million of US senior notes (for details of repurchases see note 22) and €198 million drawn from the group’s £500m revolving credit facility. In 2004 the following debt was repaid from surplus cash, $125m of 8.04% Private Placement (issued in 1994) and $250m of 7.25% US senior notes (issued in 1999).

Cash and current asset investments totalling £379m are mainly short term deposits with relationship banks or investments in AAA rated money market funds.

Following the acquisition of CMPMedica the group has moved from a net cash position at the end of 2003 to a net debt position at the end of 2004. Net debt at the end of 2004 was £68.8 million, however in early January the group received a settlement payment of £32 million from Granada in relation to outstanding items following the 2000 disposals.

The group retains a £500m revolving credit facility provided by a syndicate of relationship banks (maturity August 2006). The drawn margin on this facility is 45 basis points, the interest cover covenant (ratio of operating profits to net interest paid) is 3 times (there are no net assets or gearing covenants). In 2004 the group had net interest income, before pension scheme financing charges, of £12.5m. At 31 December 2004 the undrawn element of the facility was £360m.
Exposure to interest rates is managed through the use of interest rates swaps. At the end of 2004 £260 million (notional sterling equivalent) of interest rates swaps are outstanding.

Foreign currency transaction exposures are covered as they arise using forward foreign exchange contracts. There are no material contacts outstanding at the end of 2004. We do not hedge profit or balance sheet translation as they are accounting rather than cash exposures. However, foreign currency borrowings are used where appropriate to provide an economic hedge against investment in overseas territories.

Our long term credit rating remains investment grade with a Standard & Poor’s rating of BBB and Moody’s Baa2 both with a stable outlook.

Going Concern
Having reviewed the group’s liquid resources, borrowing facilities and cash flow forecast, the directors believe that the group has adequate resources to continue as a going concern for the foreseeable future.

Nigel Wilson
Chief Financial Officer
24 February 2005

     
 
  back to top